#IGCommodityChat2: the future of the crude oil market

On Thursday 29 November, we sat down with oil industry experts, Malcolm Graham-Wood and Spencer Welch, to discuss what the future of the crude oil industry might be. Watch the video for the full chat or read the summary below.

Does OPEC still have the power that it used to?

Malcolm Graham-Wood: In my view, it still has control over the marginal barrel, even though OPEC itself doesn’t produce any more than 40% of the world’s oil. OPEC has large enough oil reserves that it can either stop producing all together, which would push the price up, or to do what they tried to do a few years ago, which was to flood the market. But this doesn’t work, as you have other players like the United States that will produce for cash, whatever the price is.

Has OPEC lost its authority over the oil market? If so, who or what is now the dominant player?

Spencer Welch: I do agree with what Malcolm has said, but they are less significant than they were. I think that really their influence has decreased with the surge in shale oil from the United States, which has turned the market on its head. This has probably made OPEC wake up a bit and think about what they need to do.

In October 2018, the price of oil started to fall. What does this mean for the future of the crude oil market and can it be likened to the 2008 financial crash?

Spencer Welch: It is unusual, and it is hard to compare it with any one particular period in the past. There are a number of factors, almost like a perfect storm which has hit the oil market. At the end of September and up to the third of October, the price was at $86 and rising. There were those within the bull market that were saying it was just a matter of time before $100 was hit.

The global economy was looking good, the demand was growing, US production had stalled, and the US appeared to be going after Iran very aggressively by cutting their exports down to zero. Then literally in a matter of weeks or less, all of those factors changed – the US had issued waivers, the global economy has had a few concerns and US production is back up.

Malcolm Graham-Wood: Not everyone went for $100, although I was perhaps a lot more bearish than most. There were plenty of people out there going for $100 for all the reasons Spencer just talked about. The first week in November was the real interesting point, because that was the weekend that the sanctions on Iran were due to come in. But well before that, in what is traditionally the tightest quarter of the year, the Russians and the Saudis had jacked up production.

We now know that the Saudis, who had been producing 10 million barrels a day for export, were actually producing over 11 million and the Russians had gone up to 11.4 or 11.5 million. So, when the waivers came in and were bigger than expected, the market came down.

Spencer Welch: When OPEC met in June, they released the constraints that they had self-imposed. So, Russia and Saudi were almost doing what they had been encouraged, or what they had agreed amongst themselves, to do.

Watch the full video for more on oil

Throughout the discussion, Malcolm and Spencer covered a range of topics, including:

If you’d like to find out more about these topics and more, watch the full oil #IGCommodityChat video.

Our final IG Commodity Chat will be taking place this Thursday 6 December at 1pm (UK time) and will look at everything related to the base metals market. Put your questions to economist Daniel Lacalle and mining analyst John Meyer by posting on the IGCommodityChat Community page, or using #IGCommodityChat on Twitter or Facebook.